Shading trust and trusting shade: enforcing contracts without knowing who’s on the other side

“It’s good to trust others but, not to do so is much better.” – Benito Mussolini “There’s ways you can trust an enemy you can’t… Read more

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“It’s good to trust others but, not to do so is much better.”

– Benito Mussolini

“There’s ways you can trust an enemy you can’t always trust a friend. An enemy’s never going to betray your trust.”

– Daniel Abraham

The robust rule of law, and ability to enforce contracts is a bedrock of commercial enterprise. Without remedies there wouldn’t be contracts, and people would be less inclined to expose themselves to risk beyond their faith in the personal reputation or brand of their counterparty.

In this note, I set out a framework for how blockchain technologies can change the classic approach to trust, security, and remedies in commercial bargains.

Trust is a quaint feeling of faith that a person will do a thing. Trust is based on brand and reputation, which requires knowing the identity or track record of a person, from which we gather our observations about them and see what reputation they have. As a prediction of the future, it operates in a different realm to the options available if that trust is breached.

Knowing the identity of a person allows us to assess their trustworthiness, but also allow us, in a society with a strong rule of law, to involve courts to seek a remedy against that person. Not always, but courts classically require knowledge of the identity of the parties.

Security is the means to double down on having remedies if our trust is breached. It allows, with a strong rule of law, us to announce to the world that assets are encumbered, and processes such as property registration prevent their sale, or processes such as corporate charges or the principles of equity place our rights above those of a purchaser. Again, this traditionally requires knowing the identity of the counterparty, and the relevant assets, to make this effective.

Of course, we don’t need to know the identity of the counterparty to a contract – most high street transactions (pre credit cards) have at least one anonymous party. A contract is a contract once offer, acceptance, intention to create legal relations, certainty and consideration are present – no need for identity.

The confidence assessment

So we have a package of factors that inform our confidence to enter into a contract: (a) the chronology of events as to whether there is an opportunity for mischief; (b) knowing identity as it allows us to easily seek court based remedies; (c) trust and faith that past behaviour is a predictor of future behaviour; and (d) security that the courts will prevent the sale of, or give us greater rights over, assets that we can encumber as part of the bargain.

Without identity, only making arrangements that make mischief difficult remains. Court based remedies against anonymous people are tough – you need to serve notice on a real person, enforcement of a judgment through contempt, bailiffs and the like is ultimately applied against an identified person, injunctions against classes of people are possible, but difficult, and injunctions against unidentified persons are a legal novelty. Parts of this can be addressed in an anonymous contract, but parts of it carry great uncertainty in civil procedure.

Blockchain approaches

In blockchain based approaches knowing the identity of the counterparty is the exception. Therefore we will have a difficult and expensive time seeking court based remedies, and so we need to bolster the other three limbs of the ‘confidence’ equation.

The opportunity for mischief can be readily reduced – through self-executing contract, inbuilt escrow, conditional events, oracles, etc. the chronology can be established that keeps incentives more aligned.

Securitisation is achievable, digital assets can be staked, only to be released upon certain agreed events, perhaps involving third party experts, a consensus of trusted people, etc. Serious collateral can be staked, with clear tests for its release, without any need for identity.

Trust – that squishy feeling that is going to go ok, can still apply without identity– reputations can be pseudonymous for example – but identity isn’t needed so much. With the right smart contract, and the right security, adequate remedies to insure against contractual breach can be built. It is of course inconvenient to have a counterparty breach a contract on you, but entering into the contract in the absence of confidence can be priced in – penalties are of course unenforceable, but liquidated damages, variable pricing mechanisms, indemnities, etc. can all apply such that the risk and uncertainty have cash staked against them, and cash that can be recovered.

50 shades

In summary, we can see ways that both trust and identity can both operate on a spectrum, and we still have working and enforceable commercial bargains. Having an anonymous or pseudonymous counterparty does not stop us proceeding in itself. Similarly, not trusting the counterparty completely, or even not at all, does not stop us proceeding, in itself. We can still create contracts and bargains which in practice carry remedies, despite these hurdles.

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Kemp Little LLP is a limited liability partnership registered in England and Wales (registered number OC300242) and is authorised and regulated by the Solicitors Regulation Authority. Its registered office is Cheapside House, 138 Cheapside, London EC2V 6BJ. The SRA Handbook can be accessed by clicking here.